The payments landscape has undergone a significant transformation over the past year. Here’s a look ahead at which payment trends are expected to emerge and continue in 2021. The past fourteen months have significantly altered the payments landscape. The pandemic has not only shifted consumer behavior but also driven payments organizations to evolve the services they offer and how they operate. We explore some of the more prominent trends we can expect for the rest of 2021.
The Rise of Payments-as-a-Service (PaaS)
Payments-as-a-Service (PaaS) is rising in popularity as a way to streamline and outsource payments platform technology and operations. PaaS offers an on-demand, cost-effective way to leverage payments services and to create unique solutions for customers. The market is hot — it’s expected to grow to $16.7 billion by 2024.
Leveraging SaaS enables financial institutions (FIs) to remain competitive and relevant via innovation. One of the biggest reasons behind the SaaS push is that these services are an effective way to enhance legacy payment infrastructure while also improving the customer experience (CX) — a notorious challenge in a fast-paced regulatory environment that leaves FIs playing catch-up. The predictable operating cost of SaaS solutions also provides the flexibility needed to modernize, add new payment schemes, and dutifully meet growing customer expectations around convenience.
This trend toward PaaS is a big opportunity for fintechs and payment platforms that are poised for lucrative partnerships with FIs in addition to building groundbreaking new payments solutions that move payments technology into the future.
Payment Firms Leveraging Distributed Ledger Technology (DLT)
The use of DLT has been on an upward trajectory within the financial services space, especially for identity management, trade finance, and cross-border payments and settlements. Inefficiencies in the latter drove many FIs to consider DLT platforms to optimize cross-border settlement time and reduce costs. One example is Brazil’s Banco Rendimento, which adopted RippleNet Cloud in partnership with Ripple. This partnership leveraged blockchain to facilitate faster cross-border transactions.
On the identity management front, DLT is extraordinarily important for authentication and authorization in an open environment. Federated digital identity — the linking of an individual’s identity and attributes stored across disparate identity management systems — is gaining momentum as a DLT use case to mitigate identity theft and prevent payment fraud.
Overall, the use of DLT and Blockchain reduces intermediaries, drives down costs, and eliminates the need for third-party verification.
Payments Led by Data-Driven, Personalized Offerings
Data is an essential asset for payments organizations as they roll-out new value-added offerings, and a significant investment in data analytics will support this forward motion. By developing data-driven services around fraud prevention, credit risk, rewards, loyalty, and compliance, payments companies are relying more heavily on data analytics. In fact, global spend on big data analytics surpassed $180 million in 2019.
They are also positioned to use big data to help merchants better understand customer purchasing behavior, payment trends, and other customer information that can boost conversion rates. PayPal offers an example here in its Smart Payment Buttons, which offer relevant payment options to customers based on cookies, location, and other factors. Paired with its One Touch and Shopper Insights tools, PayPal is arming merchants with valuable information about customers and their shopping trends that can be used to personalize offerings and payment options.
It’s also expected that IoT adoption will create a boom in customer data volumes, subsequently bolstering the need for robust data aggregation and synthesis. Not only will this rich customer data aid in risk-based authentication and KYC efforts, but it will provide financial institutions, payments firms, and merchants the ability to significantly personalize the customer experience.
Alternative Payments Adoption is in Hyperdrive
The pandemic has fueled the adoption of emerging and alternative payment methods, including mobile wallets, contactless payments, buy now, pay later, Click to Pay, and wearable payments. As consumers have increasingly come to rely on digital payment options and veered away from carrying cash, payments organizations are pushing out innovative solutions to match the increased interest.
The pandemic spurred a bevy of behavioral changes among consumers, including a drastic shift to online shopping and digital payments rather than cash. This movement was further driven by financial institutions who stepped up to the call for more digital options by increasing card limits and waiving fees on some digital offerings.
The result has been a rush of contactless payments adoption, creating a projected 32% CAGR between 2020 and 2024 and topping roughly $6 million in transaction value at the end of that period. It’s projected that digital wallets will be the top online payment choice for online shopping within the next two years. Even wearables like smartwatches and AR glasses are seeing an uptick in activity, with the wearables payments market expected to see a 22% CAGR between 2020 and 2027.
The payments landscape has significantly skewed in the direction of digital, due largely to the pandemic and shifting consumer behaviors. Most of the trends for the coming year will center around the continued movement in the digital direction, and harnessing the data and tools available to add personalization, security, and an improved customer experience.